Top bankers mull measures to tighten lending to corporates

'The umbilical cord connecting public sector banks to politicians and bureaucrats ... has led to several inefficiencies'

The Punjab National Bank unearthed a Rs 11,400-crore fraud at its Kalagodha branch in Mumbai.Reuters

Top executives of public sector banks have agreed on several measures to tighten lending in the backdrop of the Rs 14,000 crore PNB scam. One of the main outcomes of a workshop attended by chief technology officers, chief risk officers and executive directors of public sector banks is that PSBs will now move loans for companies with exposure of more than Rs 2.5 billion to a consortium.

To address the risks in a multiple banking arrangement, the consortium model ensures common documentation, same collateral and more financial control over transactions, the executives said. "In case of multiple banking arrangements there is no discipline. There will, preferably, be consortium lending for loans above Rs 2.5 billion," MS Sastry, SBI's deputy managing director and chief risk officer, told the Business Standard.

The workshop was held to explore ways to put in place better risk management in public sector banks in the backdrop of the multi-crore fraudulent transactions at PNB using the Letter of Undertaking (LoU) route. PSBs account for more than 70 percent of the banking system in the country.

"In a multiple-bank arrangement, banks are not aware of the transactions that take place between the borrower and other lenders. Under a consortium, the control will be better. All the loans will progressively be brought under consortium and we feel genuine borrowers will have no issue with such an arrangement," a senior PSB director said.

The move comes in the aftermath of the grave concern raised by lax governance in public sector banks and rising NPAs. Reserve Bank Governor Urjit Patel also highlighted the disparity in governance between private sector and public sector banks earlier this week.

Patel said the RBI should be granted more powers to regulate PSBs, which are government-owned. "Legal reforms are thus highly desirable to empower the RBI to fully exercise the same responsibilities for PSBs as now apply to private banks, and to ensure a level playing field in supervisory enforcement," Patel said in a speech at the Gujarat National Law University.

The gross non-performing assets in the public sector banks stood at Rs 7.6 lakh crore at the end of FY 2017. More slippages are estimated this fiscal, and the GNPA is projected to rise to almost 9 lakh crore. That's the numbers for the public sector banks, which the government owns on behalf of the tax payers.

A comparison with private sector NPAs show that the state of affairs at PSBs is far worse. As per data placed in parliament by Finance Minister Arun Jaitley, the gross NPAs of private banks as of August 2017 was Rs.73,842 crore. That's less than 10 percent of the public sector NPAs. As per the Reserve Bank of India's Financial Stability Report apart from NPAs, the stressed assets account for another 12.8 percent of the total loans.

"The umbilical cord connecting public sector banks to politicians and bureaucrats, which in turn stems from the ownership structure of these banks, has led to several inefficiencies," says Brookings report.

Imprudent lending

The report says that some of the perils of PSBs are disempowered boards, systemic risks due to continual bureaucratic meddling, widespread frauds and endemic corruption and opacity at various levels.

A 2015 discussion paper presented by Gajendra Haldea, former advisor to the deputy chairman of planning commission, underscores most of these observations. Haldea highlights 'cavalier lending as one of the hallmarks of PSBs.

"Enormous sums of money were lent by the PSBs to private sector infrastructure projects in a manner that can only be described as cavalier because prudence as well as due diligence were conspicuous by their absence. Financing of gold-plated costs, reckless disbursement of funds, irresponsible waiver of conditionalities, bypassing of contract terms, lack of any worthwhile stake of the project sponsors and diversion of funds became the principal attributes of PSB lending to infrastructure projects."

He says that the rampant irregularities in the banking system has left the RBI powerless in executing due oversight.